Infrastructure Financing Challenges of Compact Development

The City of Santa Rosa has an answer to the climate change problem. Voters there recently approved a rail transit system that will link Sonoma and Marin counties to the San Francisco Bay. Santa Rosa city officials are working to get an 11-acre mixed-use development off the ground, adjacent to a rail station site that will be built in the next five years as part of the Sonoma Marin Area Rail Transit (SMART) system. In addition, Santa Rosa has developed a Downtown Station Area Specific Plan that calls for increased density and activity within walking distance of the SMART station.

The planned 11-acre development comprises retail, homes and a number of affordable housing units close to the city’s downtown Courthouse Square. This development and the intensified land uses proposed in the Downtown Station Area Specific Plan are just the types of development that would be ideal to reduce greenhouse gas (GHG) emissions and vehicle miles traveled.

There is just one problem: The projects don’t pencil out. The 11-acre parcel is a brownfield site, and the toxic soil must be cleaned before the project is shovel ready --- at a cost exceeding $600,000. And before the Downtown Station Area Specific Plan can be implemented, the city will need to make sewer and water system improvements, estimated at $2.4 million for sewer trunk and collector replacement and $250,000 for water main upgrades. These are needed because increases in density and building heights generally require greater water flow.

This is not an isolated problem. Many local agencies must contend with site-specific and infrastructure limitations, such as sewer capacity limitations, in order to approve the infill developments that can help reduce GHGs.

While there has been a great deal of discussion about how compact development patterns can reduce GHG emissions, little thought has been given to overcoming the constitutionally imposed fiscal constraints on developing the infill infrastructure necessary to serve this type of development.

The fiscal tools that cities need to fund infrastructure were developed during the suburban expansion that followed World War II and, later, Proposition 13.

Urban Infrastructure Funding Is Problematic

Compact development in existing urban areas requires an analysis of the existing parcel and the quality of the services that will be needed, whether it’s more sewer capacity, fire trucks that can make multi-story rescues, modern stormwater systems that can meet new federal requirements or improved schools to keep families from seeking higher performing school districts (as measured by test scores).

When cities approve development in "greenfields" (undeveloped land), much of the cost of infrastructure is captured through development fees because the new infrastructure will serve only the new development. The fees therefore meet the proportionality requirement of the Takings Clause of the federal and state constitutions, which in essence says you can charge fees only in proportion to the development’s impact. Likewise, Mello Roos financing districts can be created to cover the ongoing cost of providing services for schools, parks and other improvements.

This natural proportionality does not exist in urbanized areas. Any new infrastructure must serve old and new residents alike. But the proportionality requirement limits the amount that cities can charge developers --- new development can pay only its fair share. Cities are specifically prohibited from charging fees on new development to fix deficiencies in existing infrastructure (see California Government Code section 66001g).

Thus, cities must turn to other revenue sources. But they encounter another constitutional limitation: the two-thirds voting requirements of Props. 13 and 218 on property taxes and assessments.

In short, to fund the infrastructure needed to make infill work, local governments must get two-thirds of the existing residents within an urbanized area to approve a new assessment or tax in order to approve a project that will, in effect, create more density and traffic in their neighborhoods.

Recent State Actions Send the Wrong Signal

Many of the state’s solutions to the budget crisis of the past two years are sending the wrong signal if the goal is to encourage more compact development.

First, the state raided "spillover" funds from the sales tax on gasoline in the 2007-08 budget. These funds are supposed to fund transit, which will also need more funding if people who live in compact developments are actually going to get out of their cars.

Second, in the most recent budget, the state elected to take $350 million from local redevelopment funds --- which currently serve as the one consistent funding mechanism available to local agencies for revitalizing existing urban areas and paying for new infrastructure.

Some argue that the $1.15 billion of Prop. 1C bond revenue for infill infrastructure and transit-oriented development provides an appropriate source of funding. These funds have helped, but they fall well short of the need. In the first round of funding, the state received more than $1.5 billion in applications for $485 million in bonds; out of 183 applicants, 62 succeeded.

But the larger problem is the lack of a sustainable source of revenue that can provide ongoing funding for retooling the urbanized areas in California’s cities. It’s unrealistic to expect that all such infrastructure needs will be met through bonds. Local communities need a funding source that does not require a two-thirds vote or other cumbersome mechanism before it can be used.

The Promise of AB 32, SB 375 and Sustainable Communities

The overarching state goal to reduce GHG emissions places this issue squarely in the spotlight. According to a July 2008 poll conducted by the Public Policy Institute of California, 80 percent of Californians believe that urgent action is needed to address global warming.

The question is: How does this need for action translate into new resources for local officials to rebuild urban infrastructure such as parks, sewers, storm drains, schools and fire protection services? The federal economic stimulus package is likely to make substantial one-time funding available for these types of projects. But that is not a long-term solution that can be carried forward to 2020, or even 2050, the primary goal years for GHG reductions set by AB 32 and executive order.

A number of AB 32 supporters, however, have suggested that the revenues from carbon permits or the auction under the cap and trade system could go to directly help fund infrastructure to support compact development. Others have suggested support for something similar to the 55 percent voter requirement for school bonds that was approved when California voters supported Prop. 39 in 2000.

Regardless of the method, cities must vigorously engage in the debate about what is really needed to revitalize our communities. By sharing real-world examples, city officials provide the impetus for legislators and other interest groups to demand change that would enable revitalization. City officials can explain how toxic-free soil or bigger sewer pipes will translate into new shops and housing near transit or how the security associated with a new police station will give parents the confidence to allow their kids to walk --- instead of being driven --- to a school five blocks away.

Thus, for cities like Santa Rosa, the good news is that change may finally be in the air, but it’s up to local officials to make the case for that change.